There are five factors we strongly recommend you consider before you put your early retirement plans in place. If you already know about the FIRE movement (Financial Independence Retire Early) and are keen to get in on the action and plan your early retirement, then keep reading and tune in to watch the full episode on YouTube: https://youtu.be/PGdkbUG03hw!
If you're pursuing early retirement as a goal, you need to get precise with numbers — we would consider early retirement to be giving up work before the age of 60. Of course, you might have another number in mind, but in terms of retirement income planning and making retirement savings, 60 is the magic number we have in mind.
Is There a Downside to Retiring Early?
Contrary to what you might think, there are a few downsides to early retirement. Sure, you'll have all the time in the world to do the things you love, to see the family, travel the world, or pursue all those hobbies and pastimes you love, but you need to be strategic in your retirement planning if you want to make sure you have an annual income that supports all those fun activities.
In this article we're discussing ways that wannabe early retirees can start their financial planning for the future now.
What to Consider Before Retiring Early?
We're going to discuss Medicare and health insurance, your current savings vehicles, and the impact of moving money out of your retirement account and IRAs. We're also going to talk about longevity and inflation and how they can impact your decision to retire early. And lastly, we're going to touch on the ebbs and flows of the stock market and how paying attention to them can help you retire earlier.
1. Social Security Benefits
When you download your retirement benefits social security statement (sign up here: https://www.ssa.gov/myaccount/), it is critical to remember that the projection you see assumes you are going to work until full retirement age and so is unlikely to be accurate in terms of retirement income if you retired early.
Social security projections look at the highest 35 years of earnings, so if you're retiring in your fifties, there's a potential that your earlier years of working had a lower income which could affect your estimate. This is why we always recommend that you meet with a financial advisor when making plans for early retirement - there are often a few unexpected twists and turns in meeting your retirement goals!
2. Medical Costs
The next thing we want to dive into is Medicare and health insurance. Medicare will kick in at the age of 65 if you're eligible, so keep in mind that if you are planning early retirement, there will be a gap in which you have no employer and will therefore have to pay for your own medical insurance. Which can be an extraordinarily expensive proposition.
Private health insurance can very easily cost upwards of $2,000 per month per person as you get close to age 65 before Medicare kicks in. So, when you're looking at how much income you'll need to retire early, you MUST factor in the pretty significant monthly cost of taking care of your health.
3. IRA Withdrawal
If you want to retire early, you might also be considering taking money out of your traditional IRA. Unless you're 59 and a half, when you take money out of your IRA, there will be a 10% early withdrawal penalty. So, if you are hoping to retire at 50, for example, and you need to access money from your IRA to fund your early retirement, you need to speak to your financial planner about a 72T distribution, which offers a way to take out money from your IRA without penalty prior to age 59 and a half.
In a nutshell, you have to take substantially equal payments for at least five years but to be completely frank, you need help from a professional with these calculations because if you get them wrong, the penalties are substantial.
We need to factor in the effects of inflation over modern life expectancy. When Social Security was enacted, they set the retirement age at the age of 65, because life expectancy at the time was 67, the government didn't foresee that down the line, they would be paying out for years and years as the average lifespan lengthened. Fast forward to today, our life expectancy is easily in the eighties, and it is not uncommon at all for people to be living well into their nineties if not one hundreds.
So, if you're planning to retire early, before the age of 60, you will have to make a plan for the effects of inflation on your investment strategy. Inflation is at really high levels right now, but the Fed doesn't target zero inflation, the Fed's monetary policy is comfortable with 2% -3% inflation. This means that over 40 years of retirement, the cost of living could easily triple —that's a big consideration to make with wealth management strategy.
5. Ebbs and Flows of the Economy
If you decide early retirement is the right way forward for you, and you have a 20, 30, or 40-year time horizon, you are undoubtedly going see the stock market go up and down during that time period. Any financially savvy person knows that trying to predict the stock market's movement with any accuracy is a challenge, even for the experts. As consumers, one of the things that we can look at to give an idea of which direction the markets going to go in the long term is the unemployment rate, which is how many people are working.
We can also look at the number of hours per week people are working and whether they are getting paid more per hour to give us an idea of what's going to be happening in the stock market. The stock market's ups and downs are normal, and fluctuations are to be expected. When the market does go down, it tends to be temporary, and we do have a Federal Monetary Policy which does a pretty good job of getting us back on track when things go wonky.
Your Road to an Epic Early Retirement
These are the five key metrics to track if you're planning an early retirement. Speak to your certified financial planner about some of the more complex ones, such as your social security monthly benefit and how not to get penalized for withdrawing money from your IRA before age 59 and a half.
When you're sitting down to go over your retirement accounts, you also need to pay close attention to whether those retirement savings will cover future living expenses. Ensure that when you take into account the potentially high costs of healthcare insurance when planning if you have enough money to retire early. We also covered how the ebb and flow of the stock market could impact investments you are relying on to fund your retirement.